Sunday, June 2, 2013

Markets ponder early end to QE3 as stocks fall

(2 June 2013)  Stocks trended lower last week as markets pondered the possibility of an early end to the Fed's quantitative easing program.  US stocks fell by about 1% with the Dow finishing the week at 15,115.   Despite a sharp sell-off Friday, Indian markets ended the week mostly unchanged with the Sensex closing at 19,760.  This outcome was not unexpected as I thought we might see some weakness enter the market after the various Jupiter influences had culminated on Thursday.  As expected, Monday's Mercury-Jupiter aspect coincided with a strong rally.  Stocks also generally rose further through Tuesday's Venus-Jupiter aspect and the entry of Jupiter into Gemini of Thursday.  Once all that bullish Jupiter energy had manifest on Thursday, that opened the door for Friday's global decline.  It is worth noting that Friday also featured a close Mars-Mercury aspect, a commonly bearish influence. 

While US markets have pulled back somewhat in the past week, we may well ask if is this yet another bull market buying opportunity or is the market finally on the verge of a larger correction?  Certainly, the Fed and other central banks continue to shovel liquidity into the market and give investors good reason to hope that the good times will continue for a while longer.  But there are some clouds on the horizon.  The Japanese market extended its decline last week and underlined the fragility of such central bank-driven rallies.  Abenomics and promises from the Bank of Japan to boost inflation pushed up stocks 60% in just a few months, but sentiment can change quickly if the market gets too far ahead of itself.  And if this Friday's US jobs report is stronger than expected, then it could be trouble (ironically) for stocks since it will likely mean an early end to the Fed's QE3.  Most of this rally has been dependent on QE3 and if the economy is recovering, then it means that QE3 has to end.  This would be negative for the market.

US treasury yields rose sharply last week, including Friday's session.  This is a red flag because bond yields and stocks usually move in the same direction as a falling stock market drives traders to the relative safety of bonds and this lowers their yields.  Not so this time around as bond buyers were demanding a higher return from Bernanke's funny money program.  While it is only one day out of a bad week for treasuries, it is something worth watching very carefully.  The Fed cannot allow yields to rise too high too soon or else the rationale for the entire QE program (i.e. low rates!) will be invalidated.  2.4% on the 10-year is one potential line in the sand that could ring alarm bells at the Fed as the market calls Bernanke's bluff of endless easing and a massively lopsided balance sheet.  Friday's yield got as high as 2.2%. 

But as we know, every bull market climbs a wall of worry, so it is entirely normal for there to be some possible trouble spots for the market.  The astrological perspective would tend to support the half-empty glass interpretation, however, as the 120-degree Saturn-Neptune aspect is due to become exact in early July.  This is usually a bearish combination, although one could argue that the 120 degree trine aspect is less damaging than the square or opposition aspects.  This pairing of Saturn and Neptune in a geometrically significant alignment is quite rare since both planets move so slowly.  The last trine aspect between Saturn and Neptune occurred in June 1977.  At that time, US stocks were in the middle of a major decline that lasted for much of that year.   Stocks fell 3-5% in June just ahead of this aspect.  This is just one data point, of course, and it would be wrong to extrapolate too much from it.  Nonetheless, it does confirm the theoretical tendency of Saturn aspects to correlate with declines in the market. 

This time around the Saturn-Neptune aspect is potentially more damaging since Saturn is due to culminate its retrograde cycle and begin to move forward again in early July just as it forms this aspect with Neptune.  This Saturn station therefore will lengthen the geometric association with Neptune and therefore makes this contact more negative.  And just to make things really interesting, Neptune also stations and begins its retrograde cycle on June 7th, just as the aspect is exact.   So this aspect will actually be extremely tight for a period of six weeks from early June to mid-July as both planets slow down around their respective stations.  This is quite an unusual and potentially harmful pairing of planets.  All other things being equal, this extended aspect between Saturn and Neptune increases the risk of a larger decline in the markets. 

As an added complicating factor, Jupiter forms a grand trine with Saturn and Neptune on July 17-22.  Jupiter is often a bullish influence and its presence in this alignment could conceivably coincide with some positive sentiment.  This might mean that market optimism will begin to return around that time window when Jupiter is strong.  Conversely, it could also indicate a time of maximum confidence and a rallying stock market.   This alternative scenarios are, in fact, opposites but both must be considered when we think about how these multi-factored alignments can manifest.  I tend to think that Saturn's bearish influence will carry the day because it will be slower than Jupiter and therefore the more powerful planetary influence.  This may be especially true in early July.  

This week should be quite interesting.  We will get a little preview of that July alignment of Jupiter-Saturn-Neptune when fast-moving Mercury inserts itself into that grand trine position with Saturn and Neptune.  What happens on Monday and Tuesday could therefore provide clues about July.  Both positive and negative outcomes are possible here.  The late week could be even more interesting as Mars forms an alignment with both Saturn and Neptune on Friday.  This looks more problematic for stocks so I would tend to think stocks could fall, maybe by a lot.  Neptune could serve as a planetary amplifier as it turns retrograde on Friday just when the Mars aspect hits.  There is quite a bit of torque with this pattern so no outcome would surprise me.  And as it happens, that powerful-looking alignment occurs on the day that the US jobs report will be released.